CoreStates Vendors, Contenders Take It on the Chin

First Union Corp.'s pending acquisition of CoreStates Financial Corp. has thrown doubts on one outsourcing contract and killed at least one potential deal.

Andersen Consulting signed a pact with CoreStates in October to upgrade the Philadelphia bank's technology systems. That contract called for Andersen to handle about 40% of CoreStates' software and systems maintenance needs.

But the ink on the 10-year deal had barely dried when CoreStates decided two weeks ago to sell itself to First Union in a stock swap valued at about $17 billion.

Austin Adams, executive vice president at First Union, said he could not discuss details of the Andersen deal, and an Andersen spokeswoman declined to speculate on the future of the relationship. Mr. Adams said that he had just received a copy of the contract and expected several meetings with senior CoreStates and Andersen officials to discuss contract options.

"We expect to make decisions very quickly," he said, adding that First Union has also used Andersen Consulting's services.

First Union, which describes itself as a technologically savvy bank, has retail capabilities that CoreStates probably hired Andersen for, said Bill Bradway, an analyst at Meridien Research of Needham, Mass.

"That's an area where CoreStates was probably looking for benefits from a combination of sources, Andersen being one of them," he said.

GE Capital, a relative newcomer to the bank computer services field, also looks like a loser in the First Union, sources said. CoreStates had spent six months considering several vendors for data center management and telecommunications services, they said, and the General Electric unit was close to getting that contract.

"We clearly had narrowed ourselves to a short list," said Michael A. Varzally, CoreStates' chief technology processing officer. But "considering our situation with First Union, it is now inappropriate."

Mr. Varzally said GE Capital had performed computer services work for Reading, Pa.-based Meridian Bancorp, which CoreStates bought last year.

Though GE Capital is not known for its computer services, it would have been a capable provider, he said.

"A thing that people probably do not realize is that the group we were talking with at GE Capital provides a lot of these services to GE-related companies," he said.

GE Capital officials did not return phone calls.

Karl Keirstead, an analyst at Lehman Brothers in New York, said GE Capital had been in an alliance with Andersen Consulting for some time. The idea had been to match up Andersen Consulting's "people-based systems expertise" with GE Capital's $6 billion technology arm, which mostly resells PCs and hardware equipment.

The combination would have been able to bid on the kinds of large-scale outsourcing contracts typically granted to more familiar names, such as International Business Machine's Global Services unit or Electronic Data Systems Corp.

But because Andersen decided not to make data center management a priority, the "alliance hasn't turned out to be very substantial," Mr. Keirstead said.

Though its agreement to buy CoreStates is awaiting approval, First Union officials are already planning an aggressive systems integration effort.

Bank officials said a merger steering committee will be led by Byron Hodnett, chief executive officer at First Union Florida. P. Sue Perrotty, CoreStates' chief information officer, would represent the Philadelphia bank during the integration.

"There are probably a handful of CoreStates systems that we will need to take a real hard look at," Mr. Adams said. "We are really just beginning a meaningful dialogue."